Private Equity – How LPs Select a GP – The 4 Ps

22nd May 2018 1911 - Blog Posts

Private Equity – How LPs Select a GP – The 4 Ps

Within private equity we are seeing a shift with Limited Partners (LPs) conducting a greater level of due diligence on the General Partners (GPs) they invest with. This can be broadly grouped into four key areas; people, performance, process, and price.

People – Top of the list is usually who is in the management team of the GP, what are their backgrounds, competencies, specific areas of expertise, and so on. Team cohesion, years of experience, their network, and ability to deliver ROI are all important aspects to delve into.

Performance – Understanding past successful deals are important but failed deals are also important because they can tell the LP a lot about the GP. Why did they make the mistake in the first place? Did they do anything to mitigate their losses? How did they keep the LPs informed? And most importantly, did they learn from their mistakes?

Process – How does the GP run their business? At this high level you basically want to know what process the GPs follow to make money – how they source, how they analyse potential deals, how they buy, how value is added, and how they decide when to exit deals. The type of GP you want to work with will not just be doing this on a wing and a prayer, they will of course use a level of intuition and gut instinct, but they should be operating within a governance structure that sets parameters.

Price – Most GPs charge a management fee which covers the operating expenses of the engagement. On top of that there is usually a performance fee which is a percentage of the return on investment. There are other commercial models that are more complex but it is advisable from an LP perspective to keep it simple and make sure the GP is incentivised to work hard.

Summary

Within this article we have examined the specific areas of due diligence in Private Equity that we are typically seeing LPs focus on; People, Performance, Process, and Price. – Read the full article…

GP Selection and Due Diligence Program

Lawson Conner are well positioned to assist institutional investors, including pension funds, sovereign wealth funds and other investor financial institutions, in their potential GP evaluation, selection and onboarding. Read more about our GP Selection and Due Diligence Program (PDF).